Subject: File No. S7-19-04
From: Stephen N Tollefsen

June 25, 2004

A reporting shell company transaction cannot be completed without a convergence of interests between two parties: the formerly private operating business usually seeking financing, on the one hand, and the shell company control persons on the other.

In my experience, the principal motivation behind shell company transactions has been the desire of shell company promoters and affiliates to obtain liquidity, i.e. cash. This motivation is, in my view, the primary reason behind the fraud and abusive pump and dump schemes associated with these transactions.

I support the recommendation of Release No. 33-8407 that registration-type information be made available under Form 8-K. However, this welcome disclosure does not, in my view, address the primary problem. The primary disincentive for shell company abuse would be to limit by rule the tradability of securities owned by shell company promoters and affiliates.

The tradability issue was addressed in part by Richard Wulff in his January 21, 2000 letter as Chief of the Office of Small Business to Ken Worm of the OTC Compliance Unit. In that letter, Mr. Wulff addressed various scenarios in which certain promoters and affiliates should be deemed underwriters of resold securities. He further stated that Rule 144 is not be available for resale transactions in certain situations, because the resale transactions appear to be designed to distribute or redistribute securities to the public without compliance with the registration requirements of the Securities Act.

Although this letter has been cited as noteworthy by CorpFin in its SEC road shows, it does not have the force of law nor does it rise to the interest level of SEC enforcement. It does, however, create uncertainty in the arena of reverse acquisition transactions and seems inconsistent with other SEC positions taken with respect to resales by underwriters.

The rulemaking contemplated by Release No. 33-8407 provides an opportunity for the SEC to introduce some clarity on this matter as well as provide a disincentive for shell company abuse. One previous commenter suggested that the SEC prohibit outright by Rule any direct or indirect trading by affiliates, including executive officers, directors and significant shareholders, of either of the constituent corporations during the 71-day reporting window. This is one possibility.

Another possible solution would be to amend Rule 144 to impose a new one-year holding period on promoters and affiliates in the event of a shell company transaction.

In any case, by addressing the tradability issue the Commission would deal directly with the cause rather than the mere symptoms of shell company abuse.